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2012 (11) TMI 308 - AT - Income TaxDisallowance made u/s 14A of the Income-tax Act alleged that assessee reflected tax free dividend income and incurred financial charges, it did not offer any disallowance u/s 14A of the Act - applicability of Rule 8D Held that - Assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment - whether or not borrowed funds had indeed been utilised in investment in shares for earning exempt income - appeal is allowed but partly for statistical purposes
Issues Involved:
1. Confirmation of addition/disallowance under Section 14A of the Income-tax Act, 1961. 2. Retrospective effect of Rule 8D of the Income-tax Rules, 1962. Issue-wise Detailed Analysis: 1. Confirmation of Addition/Disallowance under Section 14A of the Income-tax Act, 1961: The assessee filed a return declaring an income of Rs. 7,96,610/- for the AY 2004-05. During scrutiny, the Assessing Officer (AO) noted that the assessee had tax-free dividend income of Rs. 18,49,757/- and financial charges of Rs. 20,40,412/- but did not offer any disallowance under Section 14A. The AO disallowed proportionate financial expenses amounting to Rs. 10,22,674/- under Section 14A. On appeal, the CIT(A) reduced the disallowance by Rs. 48,208/-, resulting in a confirmed disallowance of Rs. 9,76,466/-. The CIT(A) relied on the Special Bench decision in M/s Daga Capital Management (P) Ltd., holding that Rule 8D is procedural and applicable retrospectively. The CIT(A) justified the disallowance by stating that the assessee's managerial and administrative manpower was utilized in making investment decisions yielding exempt income. The Tribunal found that the Hon'ble Bombay High Court in Godrej & Boyce Manufacturing Company Ltd. vs. CIT concluded that Rule 8D, effective from 24.3.2008, is not retrospective and applies only from AY 2008-09. For years before AY 2008-09, the AO must determine disallowable expenditure by a reasonable method based on facts and circumstances. The Tribunal also referenced the Hon'ble Supreme Court's decision in CIT v. Walfort Share & Stock Brokers (P.) Ltd., which emphasized the need for a proximate cause for disallowance related to tax-exempt income. The Hon'ble Punjab & Haryana High Court in CIT vs. Hero Cycles Ltd. held that disallowance under Section 14A requires a finding of incurred expenditure; if no expenditure is incurred, disallowance cannot stand. The Tribunal cited the Hon'ble jurisdictional High Court's decision in Maxopp Investment Ltd. vs. CIT, which clarified that before Rule 8D, the AO must reject the assessee's claim of expenditure with cogent reasons and then determine the expenditure using a reasonable method. Given that the CIT(A) invoked Rule 8D without the benefit of the jurisdictional High Court's decision, the Tribunal set aside the CIT(A)'s order and remanded the issue of disallowance under Section 14A to the CIT(A) for fresh adjudication. The CIT(A) was directed to consider whether borrowed funds were used for investments yielding exempt income. 2. Retrospective Effect of Rule 8D of the Income-tax Rules, 1962: The CIT(A) applied Rule 8D retrospectively, following the Special Bench decision in Daga Capital Management (P) Ltd. However, the Tribunal noted that the Hon'ble Bombay High Court in Godrej & Boyce Manufacturing Company Ltd. ruled that Rule 8D is not retrospective and applies only from AY 2008-09. Consequently, for years before AY 2008-09, the AO must use a reasonable method to determine disallowable expenditure. The Tribunal allowed the assessee's ground regarding the retrospective application of Rule 8D, aligning with the High Court's decision. Conclusion: The Tribunal remanded the issue of disallowance under Section 14A to the CIT(A) for fresh adjudication, considering the jurisdictional High Court's rulings. The ground regarding the retrospective application of Rule 8D was allowed. No additional grounds were raised, and the appeal was partly allowed for statistical purposes.
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